The Fed’s first-rate decision of the year went as planned. The Fed kept their policy rate unchanged and delivered a minimal change to the statement with a slight downgrade of consumer spending from ‘strong’ to ‘moderate’. The Fed reiterated they will keep on extending repo operations through at least April but did not signal a decision is near on a standing repo facility.
The Fed did tweak the IOER rate with a 5-basis point increase to 1.60%, zapping away a small portion of the 25-basis point cut it delivered in October. The IOER tweak was more of a housekeeping move and shows the Fed wanted to address the decline in recent weeks in the effective fed funds rate within the target range.
Fed Chair Powell clarified the slight change regarding inflation within the statement. Powell noted the committee wanted to make sure they were clear that they are not comfortable with inflation running persistently below the 2% goal. The 2% target is not a goal nor a ceiling.
Powell stated that reserves at all times will not be lower than the September levels and that $1.5 trillion should be the bottom of the range. Treasury yields fell to session lows following the Fed’s commitment to ample reserves. The 10-year Treasury broke below the 1.60% level and the dollar fell across the board.
When asked about the Fed’s take on the coronavirus, Powell noted disruption in activity in China will impact all of their trading partners. He maintains a cautious optimistic with the global economy.
The dollar fell and Treasury yields sank across the board after Fed signaled they are losing the battle (CORE PCE have not hit their target during this record long expansion) with inflation and are not comfortable with inflation running persistently below our 2% objective. Fed fund futures are now pricing in 36.5 basis points of rate cuts by the end of the year.
The Fed will slow the pace of purchases over time and markets remain fairly confident rate cuts are coming later in the year.
Despite increased odds for future rate cuts, US stocks struggled to rally as investors remain concerned over the impact the coronavirus will have on global growth. Asia is not likely to see a strong open as investors are quickly fading the initial rally that stemmed from some stellar earnings reports.
Oil did its best to fight off a bearish EIA crude oil inventory report, but sellers eventually took control and have prices looking vulnerable. The EIA report showed the four-week total product demand fell 4.1% on annual basis and that will not get a bump up following some of the softer data we have seen in the US. The headline figures showed a strong build with both crude and gasoline inventories that overshadowed the larger than expected draw with distillates.
The West Texas Intermediate crude selloff could continue but we should be nearing a floor soon. Markets are consistently shrugging off supply disruption risks in the Middle East and the possibility that OPEC + might move up their meeting to next month to announce extra measures to stabilize prices. The US oil industry needs WTI to stay above $50 a barrel or we could see the oil industry slow down exploration efforts, with some companies struggling to stay afloat.
Gold prices liked the Fed policy decision that raised the bar for policy rates to be eased this year. The Fed is likely will do nothing this year or deliver two rate cuts this year and this should support calls for a weaker dollar and higher gold prices.
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